U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from __________ to __________
Commission File Number: 0-15938
Farmstead Telephone Group, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 06-1205743
(State of other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
22 Prestige Park Circle
East Hartford, CT 06108
(Address of principal executive offices) (Zip Code)
(860) 610-6000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months, and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 30, 1999, there were 3,272,579 shares of the issuer's $.001 par
value Common Stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands, except share data) 1999 1998
- ----------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 273 $ 590
Accounts receivable, less allowance for
doubtful accounts 4,829 4,950
Inventories 6,966 6,850
Other current assets 173 194
- -------------------------------------------------------------------------
Total Current Assets 12,241 12,584
- -------------------------------------------------------------------------
Property and equipment, net 778 845
Other assets 168 69
- -------------------------------------------------------------------------
Total Assets $13,187 $13,498
=========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,759 $ 1,442
Borrowings under inventory finance agreement
(Note 2) - 3,082
Current portion of long-term debt (Note 2) 1,652 78
Accrued compensation and benefits 546 501
Other current liabilities 32 82
- -------------------------------------------------------------------------
Total Current Liabilities 3,989 5,185
- -------------------------------------------------------------------------
Long-term debt (Note 2) 2,734 1,916
Other liabilities 83 53
- -------------------------------------------------------------------------
Total Liabilities 6,806 7,154
=========================================================================
Stockholders' Equity:
Preferred stock, $0.001 par value;
2,000,000 shares authorized; no
shares issued and outstanding - -
Common stock, $0.001 par value;
30,000,000 shares authorized;
3,272,579 and 3,264,579 shares
issued and outstanding at June 30,
1999 and December 31, 1998, respectively 3 3
Additional paid-in capital 12,216 12,200
Accumulated deficit (5,838) (5,859)
- -------------------------------------------------------------------------
Total Stockholders' Equity 6,381 6,344
- -------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $13,187 $13,498
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 7,118 $ 7,133
Cost of revenues 5,285 5,311
- -------------------------------------------------------------------------
Gross profit 1,833 1,822
Selling, general and administrative expenses 1,675 1,524
- -------------------------------------------------------------------------
Operating income (loss) 158 298
Interest expense 61 51
Other income (10) (30)
- -------------------------------------------------------------------------
Income from continuing operations before income
taxes 107 277
(Benefit) provision for income taxes (11) 10
- -------------------------------------------------------------------------
Income from continuing operations 118 267
- -------------------------------------------------------------------------
Discontinued operations (Note 3):
Loss from operations - (69)
Provision for estimated costs of disposal - -
- -------------------------------------------------------------------------
Loss from discontinued operations - (69)
- -------------------------------------------------------------------------
Net income $ 118 $ 198
=========================================================================
Basic net income (loss) per common share:
From continuing operations $ .04 $ .08
From discontinued operations - (.02)
- -------------------------------------------------------------------------
Basic net income per common share $ .04 $ .06
=========================================================================
Diluted net income (loss) per common share:
From continuing operations $ .04 $ .07
From discontinued operations - (.02)
- -------------------------------------------------------------------------
Diluted net income per common share $ .04 $ .05
=========================================================================
Weighted average common shares outstanding:
Basic weighted average common shares 3,273 3,265
Dilutive effect of stock options and warrants 1 364
- -------------------------------------------------------------------------
Diluted weighted average common and common
equivalent shares 3,274 3,629
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Revenues $13,446 $12,753
Cost of revenues 10,141 9,570
- -------------------------------------------------------------------------
Gross profit 3,305 3,183
Selling, general and administrative expenses 3,185 2,879
- -------------------------------------------------------------------------
Operating income 120 304
Interest expense 128 112
Other income (18) (61)
- -------------------------------------------------------------------------
Income from continuing operations before income
taxes 10 253
(Benefit) provision for income taxes (11) 21
- -------------------------------------------------------------------------
Income from continuing operations 21 232
- -------------------------------------------------------------------------
Discontinued operations (Note 3):
Loss from operations - (152)
Provision for estimated costs of disposal - (75)
- -------------------------------------------------------------------------
Loss from discontinued operations - (227)
- -------------------------------------------------------------------------
Net income $ 21 $ 5
=========================================================================
Basic net income (loss) per common share:
From continuing operations $ .01 $ .07
From discontinued operations - (.07)
- -------------------------------------------------------------------------
Basic net income per common share $ .01 $ -
=========================================================================
Diluted net income (loss) per common share:
From continuing operations $ .01 $ .06
From discontinued operations - (.06)
- -------------------------------------------------------------------------
Diluted net income per common share $ .01 $ -
=========================================================================
Weighted average common shares outstanding:
Basic weighted average common shares 3,271 3,264
Dilutive effect of stock options and warrants 5 517
- -------------------------------------------------------------------------
Diluted weighted average common and common
equivalent shares 3,276 3,781
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21 $ 5
Adjustments to reconcile net income to net cash
flows provided by (used in) operating activities:
Depreciation and amortization 176 150
Provision for estimated costs of disposal
of discontinued operation - 75
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 121 (215)
Increase in inventories (116) (2,769)
Increase in other assets (80) (7)
Increase in accounts payable, accrued expenses
and other current liabilities 312 1,480
Increase in other liabilities 30 66
- ---------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 464 (1,215)
- ---------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (107) (92)
- ---------------------------------------------------------------------------------
Net cash used in investing activities (107) (92)
- ---------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (payments) on credit lines (641) 1,287
Repayments of capital lease obligation (49) (34)
Proceeds from exercise of stock options 16 4
- ---------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (674) 1,257
- ---------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (317) (50)
Cash and cash equivalents at beginning of period 590 1,102
- ---------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 273 $ 1,052
=================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 128 $ 112
Income taxes 16 14
</TABLE>
See accompanying notes to consolidated financial statements.
FARMSTEAD TELEPHONE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The interim financial statements are presented on a consolidated basis,
consisting of the accounts of Farmstead Telephone Group, Inc. and its wholly
owned subsidiary, FTG Venture Corporation (the "Company"). The interim
financial statements presented herein are unaudited, however in the opinion
of management reflect all adjustments, consisting of adjustments that are of
a normal recurring nature, which are necessary for a fair statement of
results for the interim periods presented. This Form 10-QSB should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
Note 2. Debt Obligations
Inventory Finance Agreement
---------------------------
On June 14, 1999, the Company repaid all amounts owed Finova Capital
Corporation ("Finova") under a $4 million inventory credit line, and entered
into an agreement for a larger credit facility with Deutsche Financial
Services Corporation, a unit of Deutsche Bank Group ("DFS"), as further
described below.
Long-term Debt
--------------
As of June 30, 1999, long-term debt obligations consisted of the following
(in thousands):
<TABLE>
<S> <C>
Borrowings under DFS credit facility $ 4,129
Obligation under capital lease 257
-------------------------------------------------
4,386
Less current portion (1,652)
-------------------------------------------------
Long-term debt $ 2,734
=================================================
</TABLE>
On June 14, 1999, the Company entered into a two-year, $10 million business
financing agreement (the "Credit Agreement") with DFS, replacing a $6
million revolving credit line with First Union National Bank and a $4
million inventory credit line with Finova. The Credit Agreement contains
the following credit sublimits: (i) a $10 million accounts receivable-based
credit line, (ii) a $10 million inventory floorplan credit line to finance
product purchased directly from Lucent Technologies, Inc. ("Lucent") or an
approved Lucent distributor, and (iii) a $1.5 million supplemental
inventory-based credit line. Borrowings under the accounts receivable line
are advanced at 80% of eligible receivables (primarily receivables that are
less than 90 days old), while borrowings under the supplemental inventory-
based line are advanced at 50% of the cost of eligible refurbished
inventory, and between 50-100% of the cost of new equipment purchased from
Lucent or an approved Lucent distributor through DFS's floorplan financing
program. These borrowings are at prime plus 1/2% (8.5% at June 30, 1999).
Borrowings under the $10 million inventory floorplan credit line are
repayable, interest-free in either two or three equal monthly installments
depending upon the product purchased. The facility calls for a commitment
fee, payable annually, of .09% of the aggregate credit line. The Company's
policy is to classify borrowings under the Credit Agreement as long-term
debt, except for amounts under the floorplan credit line that are subject to
installment payments, since it is the Company's intent to maintain the
facility for longer than one year.
The Credit Agreement restricts the Company from the payment of dividends
without the consent of DFS, and requires the Company to maintain a minimum
tangible net worth of $5.5 million through December 30, 1999 and $5.75
million thereafter. The Credit Agreement also contains covenants requiring
the Company to maintain certain debt-to-equity, interest coverage and
current asset ratios, and minimum profitability levels, all of which the
Company was in compliance with at June 30, 1999. As of June 30, 1999, the
unused portion of the DFS facility aggregated $5,871,000, of which
approximately $1,719,000 was available under various borrowing formulas.
Borrowings are dependent upon the continuing generation of collateral,
subject to the aggregate $10 million credit limit. The weighted average
interest rate on the Company's credit facilities (excluding borrowings
repayable under interest-free installments) was approximately 8.7% and 8.1%
for the three and six months months ended June 30, 1999, respectively.
Note 3. Discontinued Operations
The loss from discontinued operations for the three and six months ended
June 30, 1998 related to the operations and shut-down of the Company's
Cobotyx voice processing products business.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Revenues
Revenues from continuing operations for the three months ended June 30, 1999
were $7,118,000, a decline of $15,000 or .2% from $7,133,000 recorded in the
comparable 1998 period. End user equipment sales revenues increased by 13%
over the prior year period, due primarily to the start up of a call center
operation, however these revenue gains were offset by the discontinuance of
the Company's dealer channel at the end of February 1999. As a part of its
agreement with Lucent in becoming an Authorized Remarketing Supplier of
Classic LucentTM telephone equipment ("ARS"), the Company transferred its
new key system dealer base to another Lucent distributor. Revenues from
this channel amounted to $782,000 ( 11% of revenues) for the three months
ended June 30, 1998. Service revenues were 87% higher than in the comparable
1998 period primarily due to increases in both short-term equipment rentals
and installation services. Equipment sales revenues comprised 94% of
consolidated revenues from continuing operations for the three months ended
June 30, 1999 (97% in the comparable 1998 period), while service revenues
accounted for 6% of consolidated revenues from continuing operations in 1999
(3% in 1998).
Revenues from continuing operations for the six months ended June 30, 1999
were $13,446,000, an increase of $693,000 or 5% from the comparable 1998
period. End user equipment sales revenues increased by 8% over the prior
year period, due primarily to the start up of a call center operation,
however these revenue gains were partially offset by the discontinuance of
the Company's dealer channel as noted above. Revenues from the dealer
channel amounted to $476,000 for the current six month period, as compared
to $1,194,000 in 1998. Service revenues were 90% higher than the comparable
1998 period primarily due to increases in both short-term equipment rentals
and installation services. Equipment sales revenues comprised 93% of
consolidated revenues from continuing operations for the six months ended
June 30, 1999 (96% in the comparable 1998 period), while service revenues
accounted for 7% of consolidated revenues from continuing operations in 1999
(4% in 1998).
Gross Profit
The gross profit from continuing operations for the three months ended June
30, 1999 was $1,833,000, an increase of $11,000 or .6% over the $1,822,000
recorded in the comparable prior year period. The overall gross profit
margin was approximately 26% of revenues in both the current and prior year
periods. The Company recorded higher gross profit margins on equipment
sales revenues, due principally to equipment sold through the new call
center, and on service revenues. However, fees paid in the 1999 period
to Lucent for equipment sales under the ARS program, and higher labor
and other overhead costs had the effect of reducing the overall gross profit
margin to the prior year level. The higher labor and overhead costs were
the result of the expansion of the Company's equipment repair and
refurbishing resources in connection with the ARS program and in
anticipation of higher expected repair/refurbishing revenues.
The gross profit from continuing operations for the six months ended June
30, 1999 was $3,305,000, an increase of $122,000 or 4% over the $3,183,000
recorded in the comparable prior year period. The overall gross profit
margin was approximately 25% of revenues in both the current and prior year
periods. The Company recorded higher gross profit margins on equipment sales
revenues, due principally to equipment sold through the new call center, and
on service revenues. However, fees paid in the 1999 period to Lucent
for equipment sales under the ARS program, and higher labor and other
overhead costs had the effect of reducing the overall gross profit margin to
the prior year level. The higher labor and overhead costs were the result
of the expansion of the Company's equipment repair and refurbishing
resources in connection with the ARS program and in anticipation of higher
expected repair/refurbishing revenues.
Selling, General and Administrative ("SG&A") Expenses
SG&A expenses from continuing operations for the three months ended June 30,
1999 were $1,675,000, an increase of $151,000 or 10% over the comparable
1998 period. SG&A expenses were 24% of revenues in the current period as
compared to 21% of revenues in the comparable 1998 period. The increase in
SG&A expenses was primarily attributable to increased sales and sales
support personnel and associated expenses, as the Company opened additional
sales offices and started up a call center sales operation.
SG&A expenses from continuing operations for the six months ended June 30,
1999 were $3,185,000, an increase of $306,000 or 11% over the comparable
1998 period. SG&A expenses were 24% of revenues in the current period as
compared to 23% of revenues in the comparable 1998 period. The increase in
SG&A expenses was primarily attributable to increased sales and sales
support personnel and associated expenses, as the Company opened additional
sales offices and started up a call center sales operation, higher
depreciation expense on fixed assets, and increased bad debt expense.
Interest Expense and Other Income
Interest expense for the three months ended June 30, 1999 was $61,000, as
compared to $51,000 for the comparable 1998 period. The increase was
attributable to higher borrowing costs and short term borrowings from Finova
to finance inventory purchases. Other income for the three months ended June
30, 1999 was $10,000, as compared to $30,000 for the comparable 1998 period.
Other income in each period consisted principally of interest earned on
invested cash.
Interest expense for the six months ended June 30, 1999 was $128,000, as
compared to $112,000 for the comparable 1998 period. The increase was
attributable to short term borrowings from Finova to finance inventory
purchases. Other income for the six months ended June 30, 1999 was $18,000,
as compared to $61,000 for the comparable 1998 period. Other income in each
period consisted principally of interest earned on invested cash.
(Benefit) Provision for Income Taxes
The $11,000 income tax benefit recorded for the three and six months ended
June 30, 1999 reflected a $19,000 credit arising from the overpayment of
prior year state taxes.
Liquidity and Capital Resources
Working capital at June 30, 1999 was $8,252,000, a 12% increase from
$7,399,000 at December 31, 1998. The working capital ratio was 3.1 to 1 at
June 30, 1999, as compared with 2.4 to 1 at December 31, 1998. The working
capital improvement was primarily due to the reduction of short-term debt
obligations.
Operating activities generated $464,000 during the six months ended June 30,
1999 principally due to a reduction in accounts receivable and an increase
in accounts payable.
Investing activities used $107,000 during the six months ended June 30, 1999
from the purchase of fixed assets, principally computer hardware and
software.
Financing activities used $674,000 during the six months ended June 30,
1999, principally from the reduction of outstanding borrowings under the
Company's credit facilities. On June 14, 1999, the Company entered into a
two-year, $10 million business financing agreement (the "Credit Agreement")
with DFS, replacing a $6 million revolving credit line with First Union
National Bank and a $4 million inventory credit line with Finova. The
Credit Agreement contains the following credit sublimits: (i) a $10 million
accounts receivable-based credit line, (ii) a $10 million inventory
floorplan credit line to finance product purchased directly from Lucent or
an approved Lucent distributor, and (iii) a $1.5 million supplemental
inventory-based credit line. Borrowings under the accounts receivable line
are advanced at 80% of eligible receivables (primarily receivables that are
less than 90 days old), while borrowings under the supplemental inventory-
based line are advanced at 50% of the cost of eligible refurbished
inventory, and between 50-100% of the cost of new equipment purchased from
Lucent or an approved Lucent distributor through DFS's floorplan financing
program.. These borrowings are at prime plus 1/2% (8.5% at June 30, 1999).
Borrowings under the $10 million inventory-based credit line are repayable,
interest-free in either two or three equal monthly installments depending
upon the product purchased. The facility calls for a commitment fee,
payable annually, of .09% of the aggregate credit line. The Company's
policy is to classify borrowings under the Credit Agreement as long-term
debt, except for amounts under the floorplan credit line that are subject to
installment payments, since it is the Company's intent to maintain the
facility for longer than one year.
The Credit Agreement restricts the Company from the payment of dividends
without the consent of DFS, and requires the Company to maintain a minimum
tangible net worth of $5.5 million through December 30, 1999 and $5.75
million thereafter. The Credit Agreement also contains covenants requiring
the Company to maintain certain debt-to-equity, interest coverage and
current asset ratios, and minimum profitability levels, all of which the
Company was in compliance with at June 30, 1999. As of June 30, 1999, the
unused portion of the DFS facility aggregated $5,871,000, of which
approximately $1,719,000 was available under various borrowing formulas.
Borrowings are dependent upon the continuing generation of collateral,
subject to the aggregate $10 million credit limit. The weighted average
interest rate on the Company's credit facilities (excluding borrowings
repayable under interest-free installments) was approximately 8.7% and 8.1%
for the three and six months months ended June 30, 1999, respectively.
The Company believes that it has sufficient capital resources, in the form
of cash and availability under its credit facilities, to satisfy its
present working capital requirements. The Company does not currently have
any material commitments for capital expenditures.
Year 2000 Readiness Disclosures
The Company considers "Year 2000 ("Y2K") compliant" products to be those
which, when used in accordance with their associated documentation, will not
fail to perform in accordance with their specifications or as otherwise
warranted, in any manner that is material and adverse to the customer, as
relating to the product's handling of calendar dates provided, however, that
the products are used only with services, products and/or software that are
themselves Y2K compliant and which properly exchange accurate date data with
each other. During 1998, the Company formed a Y2K Project Team to conduct
an assessment of its internal business systems and products. The Team is
directed by the Company's Vice President of Operations and includes other
members of senior management. The Company additionally set up a Year 2000
website at www.farmstead.com that provides Y2K product information as well
as information on the progress of the Company's Y2K efforts.
The Company's significant internal computer-based systems consist of
hardware and packaged software purchased from outside vendors, which operate
in a Windows NT Local Area Network environment. The Company has been
upgrading these systems to versions represented by the manufacturers as
being Y2K compliant, and expects to complete this process by the end of
September 1999. The Company also plans to have a contingency plan developed
during the fourth quarter which will address potential operational problems
in the event an interruption in its normal operating environment should
occur. The Company currently estimates that the costs to upgrade its
internal use computer-based systems and associated computer hardware to Y2K
compliant products will not exceed $40,000, of which approximately $35,000
has been incurred to date.
The Company distributes and resells telecommunications parts and systems
manufactured by Lucent. Lucent is also the Company's major product
supplier. As such, the Company relies upon representations made by Lucent
as to the Y2K compliance status of its products. Based upon information
disseminated by Lucent, the Company believes that those Lucent products from
which the Company principally derives its sales revenues are either
currently Y2K compliant, or can be upgraded to a compliant version. For
products determined to be non-compliant, our policy is to assist our
customers in obtaining Y2K compliant components or system upgrades at a
reasonable cost when, and if, Y2K compliant versions are subsequently made
available.
To ensure the continued delivery of third party products and services,
Farmstead has been surveying its major suppliers and assessing their
responses. Since almost all of Farmstead's major suppliers are still
engaged in executing their own readiness plans, Farmstead cannot, at this
time, fully assess the Y2K risks to its supply chain. The Company will
continue to monitor the Y2K status of its major suppliers and will develop
appropriate contingent responses as these risks become clearer.
The Company believes that it is taking the necessary steps to resolve Y2K
issues and to lessen the risks associated therein. The risks to the Company
from a failure to resolve Y2K issues, either in its internal systems or from
a failure on the part of its major suppliers and key business partners, are
perceived by management to be similar for other businesses in the Company's
industry and for other businesses generally. The Company is reliant upon
its outside vendors to provide Y2K compliant upgrades to the Company's
internal computer systems. The failure of the Company to obtain such Y2K
compliant products could result in a temporary inability to process
transactions, ship product, send invoices, or engage in similar normal
operating activities on a timely basis. In such event, the Company's
operating results, including sales levels or cash flow could be adversely
affected. The Company believes, however, that this is mitigated somewhat by
the Company's relatively small size and transaction volumes, such that
alternative processing procedures could be quickly implemented to
accommodate most significant internal processes.
The Company can give no guarantee that the systems of other companies upon
which the Company relies will be converted on time, or that a significant
operating problem caused by a Y2K problem would not have a material adverse
effect on the Company. Since the Company is a distributor of Lucent
products, and Lucent is the Company's key supplier, the Company could be
materially adversely impacted by Y2K problems which impact Lucent's ability
to supply product to the Company on time, or to supply product that is Y2K
compliant. It is presently unknown to what extent the Company could be
materially adversely impacted by any of such scenarios.
Forward-Looking Statements
The Company's prospects are subject to certain uncertainties and risks. The
discussions set forth in this Form 10-QSB contain certain statements which
are not historical facts and are considered forward-looking statements
within the meaning of the Federal Securities Laws. The Company's actual
results could differ materially from those projected in the forward-looking
statements as a result of, among other factors, general economic conditions
and growth in the telecommunications industry, competitive factors and
pricing pressures, changes in product mix, product demand, risk of
dependence on third party suppliers, and other risk factors detailed in this
report, described from time to time in the Company's other Securities and
Exchange Commission filings, or discussed in the Company's press releases.
In addition, other written or oral statements that constitute forward-
looking statements may be made by or on behalf of the Company. All forward-
looking statements included in this document are based upon information
available to the Company on the date hereof. The Company undertakes no
obligation to update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The proposals voted upon at the Company's Annual Meeting of Stockholders,
held June 17, 1999, along with the voting results, were as follows:
(1) Election of Directors: All nominees were elected. The results
of balloting were as follows:
<TABLE>
<CAPTION>
Votes Votes
Nominee For Withheld
----------------------------------------------------
<S> <C> <C>
George J. Taylor, Jr. 2,772,622 258,774
Robert G. LaVigne 2,772,222 259,174
Harold L. Hansen 2,766,022 265,374
Hugh M. Taylor 2,772,222 259,174
Joseph J. Kelley 2,765,922 265,474
</TABLE>
(2) Ratification of the Appointment of Deloitte & Touche LLP as
Independent Auditors of the Company for the Year Ending December
31, 1999: The proposal was approved with 2,942,578 votes for,
61,930 votes against, 26,888 abstentions and no broker non-
votes.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits:
10(bb) Business Financing Agreement, dated June 14, 1999,
between Deutsche Financial Services Corporation and
Farmstead Telephone Group, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FARMSTEAD TELEPHONE GROUP, INC.
Dated: August 10, 1999 /s/ Robert G. LaVigne
-------------------------------
Robert G. LaVigne
Executive Vice President,
Chief Financial Officer
Exhibit 10(bb)
BUSINESS FINANCING AGREEMENT
(Floorplan, Accounts & Supplemental Inventory)
This Business Financing Agreement ("Agreement") is made as of June 14, 1999,
between Deutsche Financial Services Corporation ("DFS") and Farmstead
Telephone Group, Inc., a Delaware corporation ("Dealer"), having a principal
place of business located at 22 Prestige Park Circle, East Hartford,
Connecticut 06108.
_________________________________________________________________________
_________________________________________________________________________
1. DEFINITIONS
1.1 Special Definitions. The following terms will have the
following meanings in this Agreement and in the Other
Agreements:
"Accounts": all accounts, leases, contract rights,
chattel paper, choses in action and instruments, including
any lien or other security interest that secures or may
secure any of the foregoing, plus all books, invoices,
documents and other records in any form evidencing or
relating to any of the foregoing, now owned or hereafter
acquired by Dealer.
"Accounts Receivable Facility": a credit facility
extended pursuant to this Agreement.
"Average Contract Balance": the amount determined by
dividing: (a) the sum of the Daily Contract Balances (as
defined in Section 2.3.1) for a billing period; by, (b)
the actual number of days in such billing period.
"Default": the events or occurrences enumerated in
Section 5.
"Entity": any individual, association, firm, corporation,
partnership, limited liability company, trust,
governmental body, agency or instrumentality whatsoever.
"Floorplan Facility": a credit facility extended pursuant
to this Agreement.
"Guarantor": a guarantor of any of the Obligations.
"Inventory": all of Dealer's presently owned and
hereafter acquired goods which are held for sale or lease.
Unless otherwise set forth herein, all references to
"Inventory" shall include Supplemental Inventory.
"Obligations": all liabilities and indebtedness now or
hereafter arising, owing, due or payable from Dealer to
DFS (and any of its subsidiaries and affiliates),
including any third party claims against Dealer satisfied
or acquired by DFS, whether primary or secondary, joint or
several, direct, contingent, fixed or otherwise, and
whether or not evidenced by instruments or evidences of
indebtedness, and all covenants, agreements (including
consent to binding arbitration), warranties, duties and
representations, under this Agreement or the Other
Agreements.
"Other Agreements": all security agreements, mortgages,
leases, instruments, documents, guarantees, schedules,
certificates, contracts and similar agreements heretofore,
now or hereafter executed by Dealer and delivered to DFS
or delivered by or on behalf of Dealer to a third party
and assigned to DFS by operation of law or otherwise.
"Prime Rate": the rate of interest quoted in the New York
edition of the Wall Street Journal in the "Money Rates"
column as the "prime rate" from time to time. The Prime
Rate will change and take effect for purposes of this
Agreement on the day that the change is published.
"Supplemental Inventory": shall have the meaning set
forth in Section 2.4.2.
"Supplemental Inventory Facility": a credit facility
extended pursuant to this Agreement.
2. CREDIT FACILITIES/INTEREST RATES/GENERAL PROVISIONS
2.1 Total Credit Facility. In consideration of Dealer's payment and
performance of its Obligations and subject to the terms and
conditions contained in this Agreement, DFS agrees to provide,
and Dealer agrees to accept, an aggregate credit facility (the
"Credit Facility") of up to TEN MILLION DOLLARS ($10,000,000.00)
("Total Credit Limit"). The Credit Facility shall be available
in the form of loans under the Floorplan Facility, Accounts
Receivable Facility and the Supplemental Inventory Facility. No
loans need be made by DFS if Dealer is in Default. This is an
agreement regarding the extension of credit, and not the
provision of goods or services.
2.2 Floorplan Facility. Subject to the terms of this Agreement, DFS
agrees to provide to Dealer a Floorplan Facility of TEN MILLION
DOLLARS ($10,000,000.00) to purchase Inventory from DFS approved
vendors ("Vendors"); provided, however, that at no time shall
the principal amount outstanding under Dealer's Floorplan
Facility, Accounts Receivable Facility and the Supplemental
Inventory Facility exceed in the aggregate the Total Credit
Limit. DFS may, however, at any time and without notice to
Dealer, elect not to finance any Inventory sold by particular
Vendors who are in default of their obligations to DFS and/or
suspend or terminate the relationship or approval of any Vendor
(in any case, a "Termination"), provided, however, DFS will
continue to finance Dealer's acquisition of Inventory from such
Vendor(s) for thirty (30) days following a Termination provided
that Dealer is and does not become in Default. Supplemental
Inventory will not be financed under the Floorplan Facility and
references to "Inventory" in this Section 2.2 shall not include
Supplemental Inventory.
2.2.1 Interest. Dealer will pay DFS finance charges on the
outstanding principal debt Dealer owes DFS for each item
of Inventory financed by DFS under the Floorplan Facility
at the rate(s) shown on the Statement of Transaction
identifying such Inventory, unless Dealer objects thereto
as provided in this Agreement. The finance charges
attributable to such rates will: (i) be computed based on
a 360 day year; (ii) be calculated by multiplying the
Daily Charge (as defined below) by the actual number of
days in the applicable billing period; and (iii) subject
to the interest-free period subsidized by a Vendor, accrue
from the invoice date of the Inventory identified on such
Statement of Transaction, until DFS receives full payment
of the principal debt Dealer owes DFS in good funds in
accordance with DFS' payment recognition policy. The
annual percentage rate of the finance charges will be
calculated from the invoice date of any item of Inventory
financed by DFS, subject to the interest-free period
subsidized by a Vendor. The "Daily Charge" is the product
of the Daily rate multiplied by the Average Daily Balance.
The "Average Daily Balance" is the quotient of: (i) the
sum of the outstanding principal debt owed DFS under the
Floorplan Facility on each day of a billing period for
each item of Inventory identified on the Statement of
Transaction, divided by (ii) the actual number of days in
such billing period.
2.2.2 Financing Terms and Statements of Transaction. Dealer
agrees to pay DFS according to the financing rates and
payment terms of the Floorplan Facility for particular
Vendors as set forth in the terms letter signed by Dealer
and DFS from time to time ("Terms Letter"), a copy of
which is attached hereto as Exhibit 2.2.2 and incorporated
herein by this reference (and all references to this
Agreement shall mean and include any and all Terms
Letter(s)). In addition, Dealer and DFS agree that
certain financial terms of any advance made by DFS under
this Agreement, whether regarding finance charges, other
fees, maturities, curtailments or other financial terms,
are not set forth herein because such terms depend, in
part, upon the availability of Vendor discounts, payment
terms or other incentives, prevailing economic conditions,
DFS' floorplanning volume with Dealer and with Dealer's
Vendors, and other economic factors which may vary over
time. Dealer and DFS further agree that it is therefore
in their mutual best interest to set forth in this
Agreement and the Terms Letter only the principal terms of
Dealer's financing arrangement with DFS. Upon agreeing to
finance a particular item of Inventory for Dealer, DFS
will send Dealer a Statement of Transaction identifying
such Inventory and the applicable financial terms. The
financial terms for Inventory purchased from Vendors which
are not the subject of a Terms Letter will be set forth in
the Statement of Transaction (unless DFS and Dealer
execute a Terms Letter for such Vendors). Unless Dealer
notifies DFS in writing of any objection within fifteen
(15) days after a Statement of Transaction is mailed to
Dealer: (a) the amount shown on such Statement of
Transaction will be an account stated; (b) Dealer will
have agreed to all rates, charges and other terms shown on
such Statement of Transaction; (c) Dealer will have agreed
that DFS is financing the items of Inventory referenced in
such Statement of Transaction at Dealer's request; and (d)
such Statement of Transaction will be incorporated herein
by reference, will be made a part hereof as if originally
set forth herein, and will constitute an addendum hereto.
If Dealer objects to the terms of any Statement of
Transaction, Dealer agrees to pay DFS for such Inventory
in accordance with the most recent terms for similar
Inventory to which Dealer has not objected (or, if there
are no prior terms, at the lesser of the Prime Rate plus
one-half of one percent (0.5%) or at the maximum lawful
contract rate of interest permitted under applicable law).
2.2.3 Payment Terms. Dealer will immediately pay DFS the
principal indebtedness owed DFS on each item of Collateral
financed by DFS (as shown on the Statement of Transaction
identifying such Collateral) on the earliest occurrence of
any of the following events: (a) when such Collateral is
lost, stolen or damaged, unless the same is promptly
replaced with Collateral of equal value; (b) for
Collateral financed under Pay-As-Sold ("PAS") terms (as
shown on the Statement of Transaction identifying such
Collateral), when such Collateral is sold, transferred,
otherwise disposed of or matured; (c) in strict accordance
with any curtailment schedule for such Collateral (as
shown on the Statement of Transaction identifying such
Collateral); (d) for Collateral financed under Scheduled
Payment Program ("SPP") terms (as shown on the Statement
of Transaction identifying such Collateral), in strict
accordance with the installment payment schedule; and (e)
when otherwise required under the terms of any financing
program agreed to in writing by the parties. If Dealer
from time to time is required to make immediate payment to
DFS of any past due obligation discovered during any
Collateral review, or at any other time, Dealer agrees
that acceptance of such payment by DFS shall not be
construed to have waived or amended the terms of its
financing program. The proceeds of any Collateral
received by Dealer will be held by Dealer in trust for
DFS' benefit, for application as provided in this
Agreement. Dealer will send all payments to DFS' branch
office(s) responsible for Dealer's account. DFS may
apply: (i) payments to reduce finance charges first and
then principal, regardless of Dealer's instructions; and
(ii) principal payments to the oldest (earliest) invoice
for Collateral financed by DFS, but, in any event, all
principal payments will first be applied to such
Collateral which is sold, lost, stolen, damaged, rented,
leased, or otherwise disposed of or unaccounted for. Any
third party discount, rebate, bonus or credit granted to
Dealer for any Collateral will not reduce the debt Dealer
owes DFS until DFS has received payment therefor in cash.
Dealer will: (1) pay DFS even if any Collateral is
defective or fails to conform to any warranties extended
by any third party; (2) not assert against DFS any claim
or defense Dealer has against any third party; and (3)
indemnify and hold DFS harmless against all claims and
defenses asserted by any buyer of the Collateral relating
to the condition of, or any representations regarding, any
of the Collateral, except for claims and defenses arising
from the gross negligence or willful misconduct of DFS.
2.3 Accounts Receivable Facility. Subject to the terms of this
Agreement, DFS agrees to provide to Dealer an Accounts
Receivable Facility of TEN MILLION DOLLARS ($10,000,000.00)");
provided, however, that at no time shall the principal amount
outstanding under Dealer's Floorplan Facility, Accounts
Receivable Facility and the Supplemental Inventory Facility
exceed in the aggregate the Total Credit Limit.
2.3.1 Interest. Dealer agrees to pay interest to DFS on the
Daily Contract Balance at a rate equal to the Prime Rate
plus one half of one percent (0.50%) per annum. Such
interest will: (i) be computed based on a 360 day year;
(ii) be calculated each day by multiplying the Daily Rate
(as defined below) by the Daily Contract Balance (as
defined below); and (iii) accrue from the date that DFS
makes any Electronic Transfer (as defined herein) or
otherwise makes an advance under the Accounts Receivable
Facility until DFS receives the full and final payment of
the principal debt which Dealer owes to DFS, subject to
the terms of Section 2.12 herein. The "Daily Rate" is the
quotient of the applicable annual rate provided herein
divided by 360. The "Daily Contract Balance" is the
amount of the outstanding principal debt which Dealer owes
to DFS on the Accounts Receivable Facility at the end of
each day (including the amount of all Electronic Transfers
authorized) after DFS has credited the payments which it
has received on the Accounts Receivable Facility, subject
to the terms of Section 2.12 herein.
2.3.2 Schedules of Accounts. Dealer will, no less than weekly
or as otherwise agreed to, furnish DFS with a schedule of
Accounts ("Schedule") which will: (a) describe all
Accounts created or acquired by Dealer since the last
Schedule furnished DFS; (b) inform DFS of any rejection of
goods by any obligor, delays in delivery of goods, non-
performance of contracts and of any assertion of any
claim, offset or counterclaim by any obligor; and (c)
inform DFS of any adverse information relating to the
financial condition of any obligor.
2.3.3 Available Credit - Accounts Receivable; Paydown. On
receipt of each Schedule, DFS will credit Dealer with an
amount equal to the remainder of eighty percent (80%) of
the net amount of eligible Accounts listed in such
Schedule, minus the amount of Dealer's SPP Deficit (as
defined below) under the Floorplan Facility with DFS as in
effect from time to time (the "Available Credit"). DFS
will loan Dealer, on request, such amount so credited or a
part thereof as requested provided that at no time will
such outstanding loans exceed Dealer's maximum Accounts
Receivable Facility.
Dealer's "SPP Deficit" shall mean the amount, if any, by
which Dealer's total current outstanding indebtedness to
DFS under the Floorplan Facility as of the date of the
Inventory Report (as defined below) exceeds the Inventory
Value (as defined below) as determined by, and as of the
date of, the Inventory Report. Such SPP Deficit, if any,
will remain in effect for purposes of this Agreement until
the preparation and delivery by Dealer to DFS of a new
Inventory Report, subject to revision after any review by
DFS.
The "Inventory Report" shall mean a report provided by
Dealer to DFS by the 10th day of every month and dated as
of the last day of the prior month which specifies the
total aggregate Dealer cost of all of Dealer's Inventory
that is unsold and in Dealer's possession and control as
of the date of the Inventory Report.
Dealer's "SPP Surplus" shall mean the amount, if any, by
which Dealer's Inventory Value (as defined below) exceeds
the total current outstanding indebtedness to DFS under
the Floorplan Facility as of the date of the Inventory
Report (as defined below). Such SPP Surplus, if any,
shall remain in effect for purposes of this Agreement
until the delivery of the Inventory Report, subject to
revision after any review by DFS.
The term "Inventory Value" is defined herein to means one
hundred percent (100%) of the total aggregate Dealer cost
of all of Dealer's Inventory financed by DFS under the
Floorplan Facility that is new, remanufactured or
refurbished, and unsold and in Dealer's possession
In addition, if Dealer's outstanding loans under Dealer's
Accounts Receivable Facility at any time exceed Dealer's
Available Credit plus Dealer's availability under the
Supplemental Inventory Facility, Dealer will immediately
pay to DFS an amount not less than the difference between
(i) Dealer's outstanding loans under Dealer's Accounts
Receivable Facility, and (ii) Dealer's Available Credit.
For avoidance of doubt, DFS and Dealer agree that no
paydown will be required under the Accounts Receivable
Facility as long as sufficient availability exists under
the Supplemental Inventory Facility in an amount
sufficient to cover such paydown and vice versa.
In the event Dealer's SPP Deficit exceeds at any time (a)
eighty percent (80%) of the net amount of Dealer's
eligible Accounts, minus (b) Dealer's outstanding loans
under the Accounts Receivable Facility, plus (c) Dealer's
availability under the Supplemental Inventory Facility,
Dealer will immediately pay to DFS, as a reduction of
Dealer's total current outstanding indebtedness to DFS
under the Floorplan Facility, the difference between (i)
Dealer's SPP Deficit, and (ii) (a) eighty percent (80%)
of the net amount of Dealer's eligible Accounts, minus (b)
Dealer's outstanding loans under Dealer's Accounts
Receivable Facility plus (c) Dealer's availability under
the Supplemental Inventory Facility.
2.3.4 Ineligible Accounts. DFS will have the sole right to
determine eligibility of Accounts and, without limiting
DFS' discretion in that regard, the following Accounts
will be deemed ineligible: (a) Accounts created from the
sale of goods and services on non-standard terms and/or
that allow for payment to be made more than sixty (60)
days from the date of sale; (b) Accounts unpaid more than
ninety (90) days from date of invoice; (c) all Accounts of
any obligor with fifty percent (50%) or more of the
outstanding balance unpaid for more than ninety (90) days
from the date of invoice; (d) Accounts for which the
obligor is an officer, director, partner, member,
employee, agent, parent, subsidiary, affiliate of, or is
related to Dealer; (e) consignment sales; (f) Accounts for
which the payment is or may be conditional; (g) Accounts
for which the obligor is not a commercial, governmental or
institutional entity or is not a resident of the United
States or Canada, unless backed by credit insurance or a
letter of credit (each in form, substance, amount and
issued by an institution acceptable to DFS), or, in the
case of Accounts where the obligor is a governmental
entity, Dealer shall have complied with the Federal
Assignment of Claims Act or other applicable law to direct
payment in an amount acceptable to DFS; (h) Accounts with
respect to which any warranty or representation made
herein is not true and correct; (i) Accounts which
represent goods or services purchased for a personal,
family or household purpose; (j) Accounts which represent
goods used for demonstration purposes or loaned by the
Dealer to another party; (k) Accounts which are progress
payment, barter, or contra accounts; and (l) any and all
other Accounts which DFS deems to be ineligible.
2.3.5 Establishment of Reserves. DFS shall have the right to
establish reserves in such amounts, and with respect to
such matters, as DFS shall deem necessary or appropriate,
against the amount of loans outstanding under the Accounts
Receivable Facility which Dealer may otherwise request,
including, without limitation, with respect to (a) price
adjustments, damages, unearned discounts, returned
products or other matters for which credit memoranda are
issued in the ordinary course of Dealer's business; (b)
shrinkage, spoilage and obsolescence of Inventory; (c)
slow moving Inventory; (d) other sums chargeable against
Dealer as loans under any section of this Agreement; (e) a
material increase in Dealer's dilution percentage, as
determined by DFS; and (f) such other matters, events,
conditions or contingencies as to which DFS, in its sole
credit judgment determines reserves should be established
from time to time hereunder.
2.4 Supplemental Inventory Facility.. Subject to the terms of this
Agreement, DFS agrees to provide to Dealer a Supplemental
Inventory Facility in the amount of ONE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($1,500,000.00).
2.4.1 Interest. Dealer hereby agrees to pay to DFS interest on
the Supplemental Inventory Daily Contract Balance (as
defined below) at a rate equal to the Prime Rate plus one
half of one percent (0.50%) per annum. Such interest
will: (i) be computed based on a 360 day year; (ii) be
calculated each day by multiplying the Daily Rate by the
Supplemental Inventory Daily Contract Balance; and (iii)
accrue from the date that DFS makes any Electronic
Transfer (as defined herein) or otherwise makes an advance
under the Supplemental Inventory Facility until DFS
receives the full and final payment of the principal debt
which Dealer owes to DFS. The "Supplemental Inventory
Daily Contract Balance" is the amount of the outstanding
principal debt which Dealer owes to DFS on the
Supplemental Inventory Facility at the end of each day
(including the amount of all Electronic Transfers
authorized) after DFS has credited the payments which it
has received on the Supplemental Inventory Facility.
2.4.2 Supplemental Inventory Facility Loans. DFS will from time
to time loan to Dealer, at Dealer's request, such amount
as DFS, in its sole discretion, may deem advisable, but in
any event not more than the Loan Value (as defined below)
of Dealer's Supplemental Inventory (as defined below).
The term "Supplemental Inventory" means Inventory (a) that
is new and whose acquisition by Dealer was not financed by
DFS pursuant to the Floorplan Facility between DFS and
Dealer; (b) that is used, remanufactured and/or
refurbished telephone parts that are suitable for resale
in the ordinary course of Dealer's business; (c) that is
not obsolete or unmerchantable; (c) that is in good and
salable condition; (d) that conforms to the
representations and warranties of this Agreement; (e) that
is at all times subject to DFS' duly perfected first
priority security interest and no other lien or
encumbrance of any kind; and (f) that DFS deems, in its
sole discretion, to be acceptable for financing pursuant
to this section.
The term "Loan Value" means the lesser of (1) fifty
percent (50%) of the Value (as defined below) of the
Supplemental Inventory plus the SPP Surplus; and (2)
Dealer's maximum Supplemental Inventory Facility from time
to time established by DFS.
The term "Value" means the cost to Dealer of Dealer's
Supplemental Inventory, as determined in accordance with
generally accepted accounting principals consistently
applied.
2.4.3 Paydown - Supplemental Inventory. Regardless of the terms
of any Supplemental Inventory Financing Program with
Dealer, if at any time the aggregate amount of outstanding
loans under the Supplemental Inventory Facility exceeds
the Loan Value of the Supplemental Inventory then
acceptable to DFS plus Dealer's Available Credit, Dealer
will, immediately upon demand, repay an amount of the
loans made to it by DFS hereunder equal to the difference
between such aggregate amount of outstanding loans and the
Loan Value then acceptable to DFS.
2.4.4 Revisions of Value. Dealer agrees that the percentage of
Value advanced, the acceptability and Value of Inventory
and the period during which such advances are to remain
outstanding are and will be entirely in DFS' sole
discretion. If Inventory remains in stock for a period of
time which DFS in its reasonable judgment deems excessive,
such Inventory may, at DFS' option, be considered to be of
no value for the purpose of loans or advances although the
same remains in stock and DFS shall retain its security
interest therein according to the terms and provisions of
this Agreement and the Other Agreements.
2.5 Facility Fee. Dealer agrees to pay DFS an annual facility fee
in connection with the Accounts Receivable and Supplemental
Inventory Facility, payable in advance, on the execution of this
Agreement, and on each anniversary date thereof through the term
of this Agreement, each in an amount equal to nine hundredths of
one percent (0.09%) of the amount of the maximum aggregate
Accounts Receivable Facility and the Supplemental Facility.
Once received by DFS, an annual facility fee shall not be
refundable by DFS for any reason.
2.6 Maximum Interest. Dealer acknowledges that DFS intends to
strictly conform to the applicable usury laws governing this
Agreement. Regardless of any provision contained herein or in
any other document executed or delivered in connection herewith
or therewith, DFS shall never be deemed to have contracted for,
charged or be entitled to receive, collect or apply as interest
on this Agreement (whether termed interest herein or deemed to
be interest by judicial determination or operation of law), any
amount in excess of the maximum amount allowed by applicable
law, and, if DFS ever receives, collects or applies as interest
any such excess, such amount which would be excessive interest
will be applied first to the reduction of the unpaid principal
balances of advances under this Agreement, and, second, any
remaining excess will be paid to Dealer. In determining whether
or not the interest paid or payable under any specific
contingency exceeds the highest lawful rate, Dealer and DFS
shall, to the maximum extent permitted under applicable law:
(a) characterize any non-principal payment (other than payments
which are expressly designated as interest payments hereunder)
as an expense or fee rather than as interest; (b) exclude
voluntary pre-payments and the effect thereof; and (c) spread
the total amount of interest throughout the entire term of this
Agreement so that the interest rate is uniform throughout such
term.
2.7 Payments. DFS will send Dealer a monthly billing statement(s)
identifying all charges due on Dealer's account with DFS. The
interest and fee charges specified on each billing statement
will be: (a) due and payable in full immediately on receipt,
and (b) an account stated, unless DFS receives Dealer's written
objection thereto within fifteen (15) days after it is mailed to
Dealer. If DFS does not receive, by the 25th day of any given
month, payment of all charges accrued to Dealer's account with
DFS during the immediately preceding month, Dealer will (to the
extent allowed by law) pay DFS a late fee ("Late Fee") equal to
the greater of $5 or 5% of the amount of such finance charges
(payment of the Late Fee does not waive the default caused by
the late payment). Dealer will also pay DFS $100 for each of
Dealer's checks returned unpaid for insufficient funds (an "NSF
check") (such $100 payment repays DFS' estimated administrative
costs; it does not waive the default caused by the NSF check).
DFS may adjust the billing statement at any time to conform to
applicable law and this Agreement. Dealer waives the right to
direct the application of any payments hereafter received by DFS
on account of the Obligations. DFS will have the continuing
exclusive right to apply and reapply any and all such payments
in such manner as DFS may deem advisable in a manner consistent
with its books and records.
2.8 One Loan. DFS may combine all of DFS' advances to Dealer or on
Dealer's behalf, whether under this Agreement or any Other
Agreements, and whether provided by one or more of DFS' branch
offices, together with all finance charges, fees and expenses
related thereto, to make one debt owed by Dealer.
2.9 Notes. Loans made pursuant to this Agreement need not be
evidenced by promissory notes unless otherwise required by DFS
in DFS' sole discretion.
2.10 Certain Charges. Dealer will: (a) reimburse DFS for all charges
made by banks, including charges for collection of checks and
other items of payment, and (b) pay DFS' a fee of SIX DOLLARS
($6.00) for each transfer of funds to the Dealer by Fed Wire
Funds Transfer ("Fed Wire") and no fee will be payable by Dealer
to DFS for each electronic transfer of funds to Dealer by
Automated Clearing House ("ACH").
2.11 Collections. Unless otherwise directed by DFS, to expedite
collection of Accounts for the benefit of DFS, Dealer shall
notify all of its obligors to make payment of the Accounts to
one or more lock-boxes under the sole control of DFS. The lock-
box, and all accounts into which the proceeds of any such lock-
box(es) are deposited, shall be established at banks selected by
the Dealer and satisfactory to DFS in its sole discretion.
Dealer shall issue to any such banks an irrevocable letter of
instruction, in form and substance acceptable to DFS, directing
such banks to deposit all payments or other remittances received
in the lock-box to such account or accounts as DFS shall direct,
for application against the outstanding balance of the
Obligations. All funds deposited in the lock-box or any such
account immediately shall become the property of DFS, and any
disbursements of the proceeds in the lock-box or any such
account will only be made to DFS. The lockbox agreement with
the bank will include the bank's waiver of its offset rights
against the funds so deposited net of charges for returned items
acceptable to DFS. DFS assumes no responsibility for such lock-
box arrangement, including, without limitation, any claim of
accord and satisfaction or release with respect to deposits
which any banks accept thereunder. All remittances which Dealer
receives in payment of any Accounts, and the proceeds of any of
the other Collateral, shall be: (i) kept separate and apart from
Dealer's own funds so that they are capable of identification as
DFS' property; (ii) held by Dealer as trustee of an express
trust for DFS' benefit; and (iii) shall be immediately deposited
in such accounts designated by DFS. All proceeds received or
collected by DFS with respect to Accounts, and reserves and
other property of Dealer in possession of DFS at any time or
times hereafter, may be held by DFS without interest to Dealer
until all Obligations are paid in full or applied by DFS on
account of the Obligations. DFS may release to Dealer such
portions of such reserves and proceeds as DFS may determine.
Upon the occurrence and during the continuance of a Default, DFS
may notify the obligors that the Accounts have been assigned to
DFS, collect the Accounts directly in its own name and charge
the collection costs and expenses, including attorneys' fees, to
Dealer. DFS has no duty to protect, insure, collect or realize
upon the Accounts to preserve rights in them, but shall treat
the Accounts with the same standard of care as if DFS was the
owner thereof.
2.12 Collection Days. All payments and all amounts received on any
Account will be credited by DFS to Dealer's account (subject to
final collection thereof) on the day received in the lockbox for
purposes of determining Dealer's Available Credit, provided that
Dealer shall pay interest on such payments and amounts through
and including the next succeeding business day.
2.13 Power of Attorney. At any time which a Default by Dealer under
this Agreement shall have occurred and be continuing, Dealer
irrevocably appoints DFS (and any person designated by it) as
Dealer's true and lawful Attorney with full power to: (a)
endorse the name of Dealer upon any of the items of payment or
proceeds and deposit the same in the account of DFS for
application to the Obligations; (b) sign the name of Dealer to
verify the accuracy of the Accounts; and (c) sign the name of
Dealer on any document or instrument that DFS shall deem
necessary or appropriate to perfect and maintain perfected the
security interests in the Collateral under this Agreement and
the Other Agreements. In the event of a Default, Dealer
irrevocably appoints DFS (and any person designated by it) as
Dealer's true and lawful Attorney with full power to at any
time, in the discretion of DFS to: (i) demand payment, enforce
payment and otherwise exercise all of Dealer's rights, and
remedies with respect to the collection of any Accounts; (ii)
settle, adjust, compromise, extend or renew any Accounts; (iii)
settle, adjust or compromise any legal proceedings brought to
collect any Accounts; (iv) sell or assign any Accounts upon such
terms, for such amounts and at such time or times as DFS may
deem advisable; (v) discharge and release any Accounts; (vi)
prepare, file and sign Dealer's name on any Proof of Claim in
Bankruptcy or similar document against any obligor; (vii)
endorse the name of Dealer upon any chattel paper, document,
instrument, invoice, freight bill, bill of lading or similar
document or agreement relating to any Account or goods
pertaining thereto; and (viii) take control in any manner of any
item of payments or proceeds and for such purpose to notify the
Postal Authorities to change the address for delivery of mail
addressed to Dealer to such address as DFS may designate. The
power of attorney is for value and coupled with an interest and
is irrevocable so long as any Obligations remain outstanding and
by DFS exercising such right, DFS shall not waive any right
against Dealer until the Obligations are paid in full.
2.14 Continuing Requirements. Advances hereunder will be made by
DFS, at Dealer's direction, by paper check, electronic transfer
by ACH, Fed Wire or such other electronic means as DFS may
announce from time to time (ACH, Fed Wire and such other
electronic transfer are collectively referred to as "Electronic
Transfers"). If Dealer does not request advances be made in a
specific method of transfer, DFS may determine from time to time
in its sole discretion what method of transfer to use. Dealer
will: (a) if from time to time required by DFS, immediately
upon their creation, deliver to DFS copies of all invoices,
delivery evidences and other such documents relating to each
Account; (b) not permit or agree to any extension, compromise or
settlement or make any change to any Account, except in the
ordinary course of business; (c) affix appropriate endorsements
or assignments upon all such items of payment and proceeds so
that the same may be properly deposited by DFS to DFS' account;
(d) immediately notify DFS in writing which Accounts may be
deemed ineligible as defined in Section 2.3.4; (e) mark all
chattel paper and instruments now owned or hereafter acquired by
it to show that the same are subject to DFS' security interest
and immediately thereafter deliver such chattel paper and
instruments to DFS with appropriate endorsements and assignments
to DFS; (f) within ten (10) days after the end of each month,
provide DFS with a detailed aging of its Accounts for each
month, together with the names and addresses of all obligors.
2.15 Release. Dealer releases DFS from all claims and causes of
action which Dealer may now or hereafter have for any loss or
damage to it claimed to be caused by or arising from: (a) any
failure of DFS to protect, enforce or collect, in whole or in
part, any Account; (b) DFS' notification to any obligors thereon
of DFS' security interest in any of the Accounts; (c) DFS'
directing any obligor to pay any sum owing to Dealer directly to
DFS; and (d) any other act or omission to act on the part of
DFS, its officers, agents or employees, except for willful
misconduct. DFS will have no obligation to preserve rights to
Accounts against prior parties. Dealer waives all rights of
offset Dealer may have against DFS.
2.16 Review. Dealer grants DFS an irrevocable license to enter
Dealer's business locations during normal business hours with
reasonable advance notice to Dealer (provided, however, if
Dealer is in Default no advance notice shall be required) to:
(a) account for and inspect all Collateral; (b) verify Dealer's
compliance with this Agreement; and (c) review, examine, and
make copies of Dealer's books, records, files and business
procedures and practices. DFS may, without notice to Dealer and
at any time or times hereafter, verify the validity, amount or
any other matter relating to any Account by mail, telephone, or
other means, in the name of Dealer or DFS. Any collection by
DFS of any amounts Dealer owes DFS under this Agreement at or
during DFS' examination of the Collateral will not relieve
Dealer of its continuing obligation to pay its Obligations owed
to DFS in strict accordance with the terms of this Agreement
3. SECURITY - COLLATERAL
3.1 Grant of Security Interest. To secure payment of all of
Dealer's current and future Obligations and to secure Dealer's
performance of all of the provisions under this Agreement and
the Other Agreements, Dealer grants DFS a security interest in
all of Dealer's inventory, equipment, fixtures, accounts,
contract rights, chattel paper, security agreements,
instruments, deposit accounts, reserves, documents, and general
intangibles; and all judgments, claims, insurance policies, and
payments owed or made to Dealer thereon; all whether now owned
or hereafter acquired, all attachments, accessories, accessions,
returns, repossessions, exchanges, substitutions and
replacements thereto, and all proceeds thereof. All such assets
are collectively referred to herein as the "Collateral." All of
such terms for which meanings are provided in the Uniform
Commercial Code of the applicable state are used herein with
such meanings. Dealer covenants with DFS that DFS may realize
upon all or part of any Collateral in any order it desires and
any realization by any means upon any Collateral will not bar
realization upon any other collateral. Dealer's liability under
this Agreement is direct and unconditional and will not be
affected by the release or nonperfection of any security
interest granted hereunder. All proceeds of Collateral financed
by DFS will be held in trust by Dealer for DFS, with such
proceeds being payable in accordance with this Agreement.
4. WARRANTIES, REPRESENTATIONS AND COVENANTS
4.1 Affirmative Warranties and Representations - General. Except as
otherwise specifically provided in the Other Agreements, Dealer
warrants and represents to DFS that: (a) Dealer has good title
to all Collateral; (b) DFS' security interest in the Accounts
will at all times constitute a perfected, first security
interest in such Accounts and will not become subordinate to the
security interest, lien, encumbrance or claim of any Entity; (c)
Dealer will execute all documents DFS requests to perfect and
maintain DFS' security interest in the Collateral and to fully
consummate the transactions contemplated under this Agreement
and the Other Agreements; (d) Dealer will at all times be duly
organized, existing, in good standing, qualified and licensed to
do business in each state, county, or parish, in which the
failure to so qualify would have a material adverse effect on
its business, properties or financial condition; (e) Dealer has
the right and is duly authorized to enter into this Agreement;
(f) Dealer's execution of this Agreement does not constitute a
breach of any agreement to which Dealer is now or hereafter
becomes bound; (g) there are and will be no actions or
proceedings pending or, to Dealer's knowledge, threatened
against Dealer which might result in any material adverse change
in Dealer's financial or business condition; (h) Dealer will
maintain the Collateral in good condition and repair, ordinary
wear and tear excepted; (i) Dealer has duly filed and will duly
file all tax returns required by law; (j) Dealer has paid and
will pay when due all taxes, levies, assessments and
governmental charges of any nature except those being challenged
in good faith and as to which adequate reserves have been
established in accordance with GAAP; (k) Dealer will maintain a
system of accounting in accordance with generally accepted
accounting principles and account records which contain such
information in a format as may be requested by DFS; (l) Dealer
will keep and maintain all of its books and records pertaining
to the Collateral at its principal place of business designated
in this Agreement; (m) Dealer will promptly supply DFS with such
information concerning it or any Guarantor as DFS hereafter may
reasonably request; (n) Dealer will give DFS thirty (30) days
prior written notice of any change in Dealer's identity, name,
form of business organization, ownership, management, principal
place of business, Collateral locations (except in the cases of
rentals and repairs) or other business locations; and before
moving any books and records to any other location; (o) Dealer
will observe and perform all matters required by any lease,
license, concession or franchise forming part of the Collateral
in order to maintain all the rights of DFS thereunder; (p)
Dealer will advise DFS of the commencement of material legal
proceedings against Dealer or any Guarantor; (q) Dealer will
comply with all applicable laws and will conduct its business in
a manner which preserves and protects the Collateral; and (r)
Dealer will keep the Collateral insured for its full insurable
value under an "all risk" property insurance policy with a
company acceptable to DFS, naming DFS as a lender loss-payee and
containing standard lender's loss payable and termination
provisions. Dealer will provide DFS with written evidence of
such property insurance coverage and lender's loss-payee
endorsement.
4.2 Accounts - Warranties and Representations. For each Account
which Dealer lists on any Schedule, Dealer warrants and
represents to DFS that at all times: (a) such Account is
genuine; (b) such Account is not evidenced by a judgment or
promissory note or similar instrument or agreement; (c) it
represents an undisputed bona fide transaction completed in
accordance with the terms of the invoices and purchase orders
relating thereto; (d) the goods sold or services rendered which
resulted in the creation of such Account have been delivered or
rendered to and accepted by the obligor; (e) the amounts shown
on the Schedules, Dealer's books and records and all invoices
and statements delivered to DFS with respect thereto are owing
to Dealer and are not contingent; (f) no payments have been or
will be made thereon except payments turned over to DFS; (g)
there are no offsets, counterclaims or disputes existing or
asserted with respect thereto and Dealer has not made any
agreement with any obligor for any deduction or discount of the
sum payable thereunder except regular discounts allowed by
Dealer in the ordinary course of its business for prompt
payment; (h) there are no facts or events known to Dealer which
in any way impair the validity or enforceability thereof or
reduce the amount payable thereunder from the amount shown on
the Schedules, Dealer's books and records and the invoices and
statements delivered to DFS with respect thereto; (i) to the
knowledge of Dealer without independent investigation, all
persons acting on behalf of obligors thereon have the authority
to bind the obligor; (j) the goods sold or transferred giving
rise thereto are not subject to any lien, claim, encumbrance or
security interest which is superior to that of DFS; and (k)
there are no proceedings or actions known to Dealer which are
threatened or pending against any obligor thereon which might
result in any material adverse change in such obligor's
financial condition.
4.3 Inventory - Warranties, Representations and Covenants. Dealer
warrants and represents to DFS and covenants and agrees with
DFS that (except as otherwise specified in this Agreement or the
Other Agreements): (a) Inventory will be kept only at the
locations set forth on Exhibit 4.3; (b) on or before the 10th
day of each month and, in any event, immediately upon each
demand by DFS therefor, Dealer will execute and deliver to DFS
the Inventory Report specifying Dealer's cost of Inventory
(including the Supplemental Inventory) and such other matters
and information relating to Inventory as DFS may from time to
time request; (c) except for Inventory sent by Dealer in the
ordinary course of Dealer's business to a third party for
repair, Inventory is not and will not be stored with a bailee,
repairman, warehouseman or similar party without DFS' prior
written consent, and Dealer will, concurrently with delivery to
such party, cause any such party to issue and deliver to DFS, in
form acceptable to DFS, warehouse receipts, in DFS' name
evidencing the storage of such Inventory, and waivers of
warehouseman's liens in favor of DFS; (d) Dealer will not lend,
demonstrate, pledge, transfer, consign, or secrete any of the
Inventory or use any of the Inventory for any purpose other than
exhibition and sale, rental or lease to buyers in the ordinary
course of business, without DFS' prior written consent.
4.4 Negative Covenants. Dealer will not at any time (without DFS'
prior written consent): (a) grant to or in favor of any Entity
a security interest in or permit to exist a lien, claim or
encumbrance in the Collateral which is superior to the interest
of DFS; (b) other than in the ordinary course of its business,
sell, lease or otherwise dispose of or transfer any of its
assets; (c) merge or consolidate with another Entity, unless
Dealer is the surviving Entity and Dealer is not in Default and,
as a result of such merger or consolidation, does not otherwise
become in Default; (d) acquire the assets or ownership interest
of any other Entity; (e) enter into any transaction not in the
ordinary course of business; (f) guarantee or indemnify or
otherwise become in any way liable with respect to the
obligations of any Entity, except by endorsement of instruments
or items of payment for deposit to the general account of Dealer
or which are transmitted or turned over to DFS on account of the
Obligations; (g) except as set forth in Exhibit 4.4, redeem,
retire, purchase or otherwise acquire, directly or indirectly,
any of Dealer's capital stock; (h) make any change in Dealer's
capital structure or in any of its business objectives or
operations which might in any way adversely affect the ability
of Dealer to repay the Obligations; (i) make any distribution of
Dealer's assets not in the ordinary course of business; (j)
incur any debts outside of the ordinary course of business
except renewals or extensions of existing debts and interest
thereon; and (k) except as set forth in Exhibit 4.4, make any
loans, advances, contributions or payments of money or in goods
to any affiliated entity or to any officer, director,
stockholder, member or partner of Dealer or of any such entity
(except for compensation for personal services actually
rendered).
4.5 Financial Statements. Dealer will deliver to DFS: (a) within
ninety (90) days after the end of each of Dealer's fiscal years,
a reasonably detailed balance sheet as of the last day of such
fiscal year and a reasonably detailed income statement covering
Dealer's operations for such fiscal year, in a form satisfactory
to DFS; (b) within forty-five (45) days after the end of each of
Dealer's fiscal quarters, a reasonably detailed balance sheet as
of the last day of such quarter and an income statement covering
Dealer's operations for such quarter in a form satisfactory to
DFS; (c) within ten (10) days after request therefor by DFS, any
other report requested by DFS relating to the Collateral or the
financial condition of Dealer. Dealer warrants and represents
to DFS that all financial statements and information relating to
Dealer or any Guarantor which have been or may hereafter be
delivered by Dealer or any Guarantor to DFS are true and correct
in all material respects and have been and will be prepared in
accordance with generally accepted accounting principles
consistently applied and, with respect to such previously
delivered statements or information, there has been no material
adverse change in the financial or business condition of Dealer
or any Guarantor since the submission to DFS, either as of the
date of delivery, or, if different, the date specified therein,
and Dealer acknowledges DFS' reliance thereon.
4.6 Financial Covenants/Definitions.
4.6.1 Financial Covenants.
(a) Tangible Net Worth.
(i) Commencing on and as of the date of this
Agreement and at all times thereafter through
December 30, 1999, Dealer will at all times
maintain a Tangible Net Worth and Subordinated
Debt in the combined amount of not less than
Five Million Five Hundred Thousand Dollars
($5,500,000.00); and
(ii) Commencing on and as of December 31, 1999, and
at all times thereafter, Dealer will at all
times maintain a Tangible Net Worth and
Subordinated Debt in the combined amount of
not less than Five Million Seven Hundred Fifty
Thousand Dollars ($5,750,000.00)
(b) Leverage. As of the last day of each of Dealer's
fiscal quarters, Dealer will have a ratio of Debt
minus Subordinated Debt to Tangible Net Worth and
Subordinated Debt of not more than two and one-half
to one (2.5:1).
(c) Current Ratio. As of the last day of each of
Dealer's fiscal quarters, Dealer will have a ratio
of Current Tangible Assets to current liabilities of
not less than one and one-half to one (1.5:1).
(d) EBIT to Interest Expense. As of the last day of
each of Dealer's fiscal years, Dealer will have a
ratio of EBIT to Dealer's interest expense for the
Dealer's indebtedness for the period of calculation
of two to one (2.0:1).
(e) Quarterly Profitability. For three of Dealer's
fiscal quarters for the fiscal year January 1 -
December 31, 2000, Dealer shall have Net Income of
at least one dollar ($1.00).
(f) Annual Profitability. For each of Dealer's fiscal
years during the term of this Agreement and during
any extension period of this Agreement, Dealer shall
have a Net Income of at least Three Hundred Thousand
Dollars ($300,000.00).
4.6.2 Definitions. The terms used in this Section will be
determined in accordance with generally accepted
accounting principles consistently applied, and, if
applicable, on a consolidated basis. For purposes of this
Section certain terms used herein will have the following
meanings:
(a) "Tangible Net Worth" means the book value of
Dealer's assets less liabilities, excluding from
such assets all Intangibles.
(b) "Intangibles" means and includes general intangibles
(as that term is defined in the Uniform Commercial
Code); accounts receivable and advances due from
officers, directors, employees, stockholders and
affiliates; leasehold improvements net of
depreciation; licenses; good will; prepaid expenses;
escrow deposits; covenants not to compete; the
excess of cost over book value of acquired assets;
franchise fees; organizational costs; finance
reserves held for recourse obligations; capitalized
research and development costs; and such other
similar items as DFS may from time to time determine
in DFS' sole discretion.
(c) "Debt" means all of Dealer's liabilities and
indebtedness for borrowed money of any kind and
nature whatsoever, whether direct or indirect,
absolute or contingent, and including obligations
under capitalized leases, guaranties, or with
respect to which Dealer has pledged assets to secure
performance, whether or not direct recourse
liability has been assumed by Dealer.
(d) "Subordinated Debt" means all of Dealer's Debt which
is subordinated to the payment of Dealer's
liabilities to DFS by an agreement in form and
substance satisfactory to DFS.
(e) "Current Tangible Assets" means Dealer's current
assets less, to the extent otherwise included
therein, all Intangibles.
(f) "EBIT" means the sum of (i) Dealer's Net Income,
plus, to the extent that such items were deducted in
determining Net Income, (ii) interest expense during
the period of calculation, plus (iii) all provisions
for any federal, state or other income taxes made by
Dealer.
(g) "Net Income" and "Net Loss" means the net operating
income and net losses of the Dealer after provision
for taxes.
5. DEFAULT
5.1 Definition. Dealer will be in default under this Agreement if:
(a) Dealer breaches any terms, warranties or representations
contained herein or in any Other Agreements; (b) any Guarantor
of Dealer's debts to DFS breaches any terms, warranties or
representations contained in any guaranty or Other Agreements;
(c) any representation, statement, report, or certificate made
or delivered by Dealer or any Guarantor to DFS is not accurate
in all material respects when made; (d) Dealer fails to pay any
of the Obligations within five (5) days following the date when
due and payable; (e) Dealer abandons a material portion of
Collateral; (f) Dealer or any Guarantor is or becomes past due
in the payment of any debt owed to any third party(s) for ninety
(90) days or more in an aggregate amount in excess of
$750,000.00 (provided that Dealer shall have the right to
contest its payments to third parties in good faith without
being in Default under this subparagraph); (g) a money
judgment(s) issues against Dealer and/or any Guarantor in an
aggregate amount in excess of $250,000.00 and is not stayed,
appealed (subject to stay of execution and/or bond), vacated or
bonded within thirty (30) days of the issuance of such judgment;
(h) an attachment, sale or seizure issues or is executed against
a material portion of the assets of Dealer or of any Guarantor;
(i) the undersigned dies while Dealer's business is operated as
a sole proprietorship, any general partner dies while Dealer's
business is operated as a general or limited partnership, or any
member dies while Dealer's business is operated as a limited
liability company, as applicable; (j) any Guarantor dies; (k)
Dealer or any Guarantor shall cease existence as a corporation,
partnership, limited liability company or trust, as applicable;
(l) Dealer or any Guarantor ceases or suspends business; (m)
Dealer, any Guarantor or any member while Dealer's business is
operated as a limited liability company, as applicable, makes a
general assignment for the benefit of creditors; (n) Dealer, any
Guarantor or any member while Dealer's business is operated as a
limited liability company, as applicable, becomes insolvent or
voluntarily or involuntarily becomes subject to the Federal
Bankruptcy Code, any state insolvency law or any similar law;
(o) any receiver is appointed for any assets of Dealer, any
Guarantor or any member while Dealer's business is operated as a
limited liability company, as applicable; (p) any guaranty of
Dealer's debt to DFS is terminated; (q) Dealer loses any
material franchise, permission, license or right to sell or deal
in any Collateral which DFS finances; (r) Dealer or any
Guarantor materially misrepresents Dealer's or such Guarantor's
financial condition; or (s) there shall occur a material adverse
change in the financial or other condition or business prospects
of Dealer or any Guarantor.
5.2 Rights of DFS. In the event of a Default:
(a) DFS may at any time at DFS' election, without notice or demand
to Dealer, do any one or more of the following: declare all or
any of the Obligations immediately due and payable, together
with all costs and expenses of DFS' collection activity,
including, without limitation, all reasonable attorneys' fees;
exercise any or all rights under applicable law (including,
without limitation, the right to possess, transfer and dispose
of the Collateral); and/or cease extending any additional credit
to Dealer (DFS' right to cease extending credit shall not be
construed to limit the discretionary nature of this Credit
Facility).
(b) Dealer will segregate and keep the Collateral in trust for DFS,
and in good order and repair, and will not sell, rent, lease,
consign, otherwise dispose of or use any Collateral, nor further
encumber any Collateral.
(c) Upon DFS' written demand, Dealer will immediately deliver the
Collateral to DFS, in good order and repair, at a place
specified by DFS, together with all related documents; or DFS
may, in DFS' sole discretion and without notice or demand to
Dealer, take immediate possession of the Collateral together
with all related documents.
(d) DFS may, without notice, apply a default finance charge to
Dealer's outstanding principal indebtedness equal to the default
rate specified in Dealer's financing program with DFS, if any,
or if there is none so specified, at the lesser of 3% per annum
above the rate in effect immediately prior to the Default, or
the highest lawful contract rate of interest permitted under
applicable law.
(e) DFS may, without notice to Dealer and at any time or times
enforce payment and collect, by legal proceedings or otherwise,
Accounts in the name of Dealer or DFS; and take control of any
cash or non-cash items of payment or proceeds of Accounts and of
any rejected, returned, repossessed or stopped in transit goods
relating to Accounts. DFS may at its sole election and without
demand enter, with or without process of law, any premises where
Collateral might be and, without charge or liability to DFS
therefor do one or more of the following: (i) take possession
of the Collateral and use or store it in said premises or remove
it to such other place or places as DFS may deem convenient;
(ii) take possession of all or part of such premises and the
Collateral and place a custodian in the exclusive control
thereof until completion of enforcement of DFS' security
interest in the Collateral or until DFS' removal of the
Collateral and, (iii) remain on such premises and use the same,
together with Dealer's materials, supplies, books and records,
for the purpose of performing all acts necessary and incidental
to the collection or liquidation of such Collateral.
All of DFS' rights and remedies are cumulative. DFS' failure to
exercise any of DFS' rights or remedies hereunder will not waive
any of DFS' rights or remedies as to any past, current or future
Default.
5.3 Sale of Collateral. Dealer agrees that if DFS conducts a
private sale of any Collateral by requesting bids from 10 or
more dealers or distributors in that type of Collateral, any
sale by DFS of such Collateral in bulk or in parcels within 120
days of: (a) DFS' taking possession and control of such
Collateral; or (b) when DFS is otherwise authorized to sell such
Collateral; whichever occurs last, to the bidder submitting the
highest cash bid therefor, is a commercially reasonable sale of
such Collateral under the Uniform Commercial Code. Dealer
agrees that the purchase of any Collateral by a vendor, as
provided in any agreement between DFS and the vendor, is a
commercially reasonable disposition and private sale of such
Collateral under the Uniform Commercial Code, and no request for
bids shall be required. Dealer further agrees that 7 or more
days prior written notice will be commercially reasonable notice
of any public or private sale (including any sale to a vendor).
Dealer irrevocably waives any requirement that DFS retain
possession and not dispose of any Collateral until after an
arbitration hearing, arbitration award, confirmation, trial or
final judgment. If DFS disposes of any such Collateral other
than as herein contemplated, the commercial reasonableness of
such disposition will be determined in accordance with the laws
of the state governing this Agreement.
5.4 Connecticut Waiver. Dealer hereby waives any right to notice
and hearing under Chapter 903a of the Connecticut General
Statutes, or as otherwise allowed by any state or federal law,
with respect to any prejudgment remedy which DFS may elect to
pursue in the event of Dealer's default under this Agreement.
6. MISCELLANEOUS
6.1 Termination. This Agreement will continue in full force and
effect and be non-cancelable for TWO (2) YEARS from the date of
this Agreement (except that it may be terminated by DFS in the
exercise of its rights and remedies upon Default by Dealer);
provided however, that Dealer may terminate this Agreement prior
to such date upon: (a) at least 30 days written notice to DFS;
(b) payment to DFS of all Obligations; and (c) payment to DFS of
FIVE THOUSAND DOLLARS ($5,000.00) ("Early Termination Fee").
This sum will also be paid by Dealer if this Agreement is
terminated on account of Dealer's Default. Termination on any
date other than the anniversary date will not entitle Dealer to
a refund of any fee. This fee represents liquidated damages and
is not a penalty. It is understood that Dealer may elect to
terminate this Agreement in its entirety only, no section or
lending facility may be terminated singly.
Dealer will not be relieved from any Obligations to DFS arising
out of DFS' advances or commitments made before the effective
termination date of this Agreement. DFS will retain all of its
rights, interests and remedies hereunder until Dealer has paid
all of Dealer's Obligations to DFS. All waivers set forth
within this Agreement will survive any termination of this
Agreement.
6.2 Collection. Checks and other instruments delivered to DFS on
account of the Obligations will constitute conditional payment
until such items are actually paid to DFS.
6.3 Demand, Etc. Dealer irrevocably waives notice of: DFS'
acceptance of this Agreement, presentment, demand, protest,
nonpayment, nonperformance, and dishonor. Dealer and DFS
irrevocably waive all rights to claim any punitive and/or
exemplary damages. Dealer waives all notices of default and
non-payment at maturity of any or all of the Accounts.
6.4 Additional Obligations. DFS, without waiving or releasing any
Obligation or Default, may perform any Obligations that Dealer
fails or refuses to perform. All sums paid by DFS on account of
the foregoing and any expenses, including reasonable attorneys'
fees, will be a part of the Obligations, payable on demand and
secured by the Collateral.
6.5 NO ORAL AGREEMENTS. ORAL AGREEMENTS OR COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A
DEBT INCLUDING PROMISES TO EXTEND OR RENEW SUCH DEBTS ARE NOT
ENFORCEABLE. TO PROTECT DEALER AND DFS FROM MISUNDERSTANDING OR
DISAPPOINTMENT, ALL AGREEMENTS COVERING SUCH MATTERS ARE
CONTAINED IN THIS WRITING AND THE OTHER AGREEMENTS, WHICH IS THE
COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE
PARTIES, EXCEPT AS SPECIFICALLY PROVIDED HEREIN OR AS THE
PARTIES MAY LATER AGREE IN WRITING TO MODIFY IT. THERE ARE NO
UNWRITTEN AGREEMENTS BETWEEN THE PARTIES. DFS may, from time to
time, announce in writing to Dealer its policies and procedures
regarding its administration of this facility, including,
without limitation, DFS' fees for the transfer of funds to or
from Dealer, including Electronic Transfers; any subsequent use
by Dealer of this facility following any such announcement shall
constitute Dealer's acceptance of such revised policies and
procedures. Time is of the essence regarding Dealer's
performance of its obligations to DFS notwithstanding any course
of dealing or custom on DFS' part to grant extensions of time.
DFS will have the right to refrain from or postpone enforcement
of this Agreement or any Other Agreements between DFS and Dealer
without prejudice and the failure to strictly enforce these
agreements will not be construed as having created a course of
dealing between DFS and Dealer contrary to the specific terms of
the agreements or as having modified, released or waived the
same. The express terms of this Agreement will not be modified
by any course of dealing, usage of trade, or custom of trade
which may deviate from the terms hereof.
6.6 Severability. If any provision of this Agreement or the Other
Agreements or the application thereof is held invalid or
unenforceable, the remainder of this Agreement and the Other
Agreements will not be impaired or affected and will remain
binding and enforceable.
6.7 Supplement. If Dealer and DFS have heretofore executed Other
Agreements in connection with all or any part of the Collateral,
this Agreement shall supplement each and every Other Agreement
previously executed by and between Dealer and DFS, and in that
event this Agreement shall neither be deemed a novation nor a
termination of any such previously executed Other Agreement nor
shall execution of this Agreement be deemed a satisfaction of
any obligation secured by such previously executed Other
Agreement. In the event of any conflict between the terms of
this Agreement and any previously executed Business Financing
Agreement between DFS and Dealer, the terms of this Agreement
shall control.
6.8 Section Titles. The Section titles used in this Agreement are
for convenience only and do not define or limit the contents of
any Section.
6.9 Binding Effect. Dealer cannot assign its interest in this
Agreement or any Other Agreements without DFS' prior written
consent, which will not be unreasonably withheld or delayed,
although DFS may assign or participate DFS' interest, in whole
or in part, without Dealer's consent, provided that in such
event (unless Dealer consents), Dealer may terminate this
Agreement within 120 days of such assignment without payment of
the Early Termination Fee. This Agreement and the Other
Agreements will protect and bind DFS' and Dealer's respective
heirs, representatives, successors and assigns.
6.10 Notices. Except as otherwise stated herein, all notices,
arbitration claims, responses, requests and documents will be
sufficiently given or served if mailed or delivered: (a) to
Dealer at Dealer's principal place of business specified above;
and (b) to DFS at 655 Maryville Centre Drive, St. Louis,
Missouri 63141-5832, Attention: General Counsel, or such other
address as the parties may hereafter specify in writing.
6.11 Receipt of Agreement. Dealer acknowledges that it has received
a true and complete copy of this Agreement. Dealer acknowledges
that it has read and understood this Agreement. Notwithstanding
anything herein to the contrary: (a) DFS may rely on any
facsimile copy, electronic data transmission or electronic data
storage of any Schedule, statement, financial statements or
other reports, and (b) such facsimile copy, electronic data
transmission or electronic data storage will be deemed an
original, and the best evidence thereof for all purposes,
including, without limitation, under this Agreement or any Other
Agreements, and for all evidentiary purposes before any
arbitrator, court or other adjudicatory authority.
6.12 Information/Confidentiality.
6.12.1 Credit References/Receipt of Information. DFS may
provide to any third party any credit, financial or other
information on Dealer that DFS may from time to time
possess for the purpose of responding to requests by such
third parties for credit references. DFS may obtain from
any third party any credit, financial or other
information regarding Dealer that such third party may
from time to time possess.
6.12.2 Confidentiality by DFS. Other than as provided in
Section 6.12.1, all information provided by Dealer to DFS
which is either non-public, confidential or proprietary
in nature ("Information") will be subject to the
following terms and conditions:
(a) The Information will be kept confidential and shall
not, without Dealer's prior written consent, be
disclosed by DFS to any third party provided,
however, that DFS may provide the Information to
DFS' agents, representatives, employees, officers,
directors, attorneys, accountants or advisers
("Agents") and to DFS' corporate affiliates or their
Agents as may be necessary to evaluate the
Information and administer this Agreement and the
Other Agreements.
(b) The term "Information" does not include information
which: (a) was already in DFS' possession prior to
its disclosure by Dealer; (b) becomes generally
available to the public, other than as a result of a
disclosure by DFS or its Agents; or (c) becomes
available to DFS on a non-confidential basis from a
source (other than Dealer) which is to DFS'
knowledge entitled to disclose it.
(c) Nothing herein shall be construed to prohibit DFS
from disclosing the Information pursuant to any
court or governmental order, decree or regulation.
7. BINDING ARBITRATION
7.1 Arbitrable Claims. Except as otherwise specified below, all
actions, disputes, claims and controversies under common law,
statutory law or in equity of any type or nature whatsoever
(including, without limitation, all torts, whether regarding
negligence, breach of fiduciary duty, restraint of trade, fraud,
conversion, duress, interference, wrongful replevin, wrongful
sequestration, fraud in the inducement, usury or any other tort,
all contract actions, whether regarding express or implied
terms, such as implied covenants of good faith, fair dealing,
and the commercial reasonableness of any Collateral disposition,
or any other contract claim, all claims of deceptive trade
practices or lender liability, and all claims questioning the
reasonableness or lawfulness of any act), whether arising before
or after the date of this Agreement, and whether directly or
indirectly relating to: (a) this Agreement or any Other
Agreements and/or any amendments and addenda hereto or thereto,
or the breach, invalidity or termination hereof or thereof; (b)
any previous or subsequent agreement between DFS and Dealer; (c)
any act committed by DFS or by any parent company, subsidiary or
affiliated company of DFS (the "DFS Companies"), or by any
employee, agent, officer or director of an DFS Company whether
or not arising within the scope and course of employment or
other contractual representation of the DFS Companies provided
that such act arises under a relationship, transaction or
dealing between DFS and Dealer; and/or (d) any other
relationship, transaction or dealing between DFS and Dealer
(collectively the "Disputes"), will be subject to and resolved
by binding arbitration.
7.2 Administrative Body. All arbitration hereunder will be
conducted in accordance with the Commercial Arbitration Rules of
The American Arbitration Association ("AAA"). If the AAA is
dissolved, disbanded or becomes subject to any state or federal
bankruptcy or insolvency proceeding, the parties will remain
subject to binding arbitration which will be conducted by a
mutually agreeable arbitral forum. The parties agree that all
arbitrator(s) selected will be attorneys with at least five (5)
years secured transactions experience. The arbitrator(s) will
decide if any inconsistency exists between the rules of any
applicable arbitral forum and the arbitration provisions
contained herein. If such inconsistency exists, the arbitration
provisions contained herein will control and supersede such
rules. The site of all arbitration proceedings will be in the
Division of the Federal Judicial District in which AAA maintains
a regional office that is closest to Dealer.
7.3 Discovery. Discovery permitted in any arbitration proceeding
commenced hereunder is limited as follows. No later than thirty
(30) days after the filing of a claim for arbitration, the
parties will exchange detailed statements setting forth the
facts supporting the claim(s) and all defenses to be raised
during the arbitration, and a list of all exhibits and
witnesses. No later than twenty-one (21) days prior to the
arbitration hearing, the parties will exchange a final list of
all exhibits and all witnesses, including any designation of any
expert witness(es) together with a summary of their testimony; a
copy of all documents and a detailed description of any property
to be introduced at the hearing. Under no circumstances will
the use of interrogatories, requests for admission, requests for
the production of documents or the taking of depositions be
permitted. However, in the event of the designation of any
expert witness(es), the following will occur: (a) all
information and documents relied upon by the expert witness(es)
will be delivered to the opposing party, (b) the opposing party
will be permitted to depose the expert witness(es), (c) the
opposing party will be permitted to designate rebuttal expert
witness(es), and (d) the arbitration hearing will be continued
to the earliest possible date that enables the foregoing limited
discovery to be accomplished.
7.4 Exemplary or Punitive Damages. The Arbitrator(s) will not have
the authority to award exemplary or punitive damages.
7.5 Confidentiality of Awards. All arbitration proceedings,
including testimony or evidence at hearings, will be kept
confidential, although any award or order rendered by the
arbitrator(s) pursuant to the terms of this Agreement may be
entered as a judgment or order in any state or federal court and
may be confirmed within the federal judicial district which
includes the residence of the party against whom such award or
order was entered. This Agreement concerns transactions
involving commerce among the several states. The Federal
Arbitration Act, Title 9 U.S.C. Sections 1 et seq., as amended
("FAA") will govern all arbitration(s) and confirmation
proceedings hereunder.
7.6 Prejudgment and Provisional Remedies. Nothing herein will be
construed to prevent DFS' or Dealer's use of bankruptcy,
receivership, injunction, repossession, replevin, claim and
delivery, sequestration, seizure, attachment, foreclosure,
dation and/or any other prejudgment or provisional action or
remedy relating to any Collateral for any current or future debt
owed by either party to the other. Any such action or remedy
will not waive DFS' or Dealer's right to compel arbitration of
any Dispute.
7.7 Attorneys' Fees. If either Dealer or DFS brings any other
action for judicial relief with respect to any Dispute (other
than those set forth in Section 7.6), the party bringing such
action will be liable for and immediately pay all of the other
party's costs and expenses (including attorneys' fees) incurred
to stay or dismiss such action and remove or refer such Dispute
to arbitration. If either Dealer or DFS brings or appeals an
action to vacate or modify an arbitration award and such party
does not prevail, such party will pay all costs and expenses,
including attorneys' fees, incurred by the other party in
defending such action. Additionally, if Dealer sues DFS or
institutes any arbitration claim or counterclaim against DFS in
which DFS is the prevailing party, Dealer will pay all costs and
expenses (including attorneys' fees) incurred by DFS in the
course of defending such action or proceeding.
7.8 Limitations. Any arbitration proceeding must be instituted:
(a) with respect to any Dispute for the collection of any debt
owed by either party to the other, within two (2) years after
the date the last payment was received by the instituting party;
and (b) with respect to any other Dispute, within two (2) years
after the date the incident giving rise thereto occurred,
whether or not any damage was sustained or capable of
ascertainment or either party knew of such incident. Failure to
institute an arbitration proceeding within such period will
constitute an absolute bar and waiver to the institution of any
proceeding, whether arbitration or a court proceeding, with
respect to such Dispute.
7.9 Survival After Termination. The agreement to arbitrate will
survive the termination of this Agreement.
8. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT
IS FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH
RESPECT TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT
JURISDICTION BY A JUDGE WITHOUT A JURY. DEALER AND DFS WAIVE ANY
RIGHT TO A JURY TRIAL IN ANY SUCH PROCEEDING.
9. Governing Law. Dealer acknowledges and agrees that this and all Other
Agreements between Dealer and DFS have been substantially negotiated,
and will be substantially performed, in the Commonwealth of
Massachusetts. Accordingly, Dealer agrees that all Disputes will be
governed by, and construed in accordance with, the laws of such state,
except to the extent inconsistent with the provisions of the FAA which
shall control and govern all arbitration proceedings hereunder.
IN WITNESS WHEREOF, Dealer and DFS have executed this Agreement as of the
date first set forth hereinabove.
THIS CONTRACT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGE
WAIVER PROVISIONS.
DEUTSCHE FINANCIAL SERVICES CORPORATION FARMSTEAD TELEPHONE GROUP, INC.
By: /s/ Mark B. Schafer By: /s/Robert G. LaVigne
Print Name: Mark B. Schafer Print Name: Robert G. LaVigne
Title: Vice President, Operations Title: Exec. Vice President
& CFO
ATTEST:
/s/ Neil R. Sullivan
(Assistant) Secretary
Print Name: Neil R. Sullivan
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